Will limited IPO allocations curb individual participation?

Impact of Limited Allocation on IPO Appeal for Retail Investors

Financial analyst Hussein Al Attas stated that limited allocation may reduce the attractiveness of IPOs for retail investors, but it is not the sole factor determining their participation.

He added that expected stock performance after listing, offering price premium, and investor strategy are also key factors influencing participation decisions. He noted that if the limited allocation policy continues excessively, it could negatively impact retail investor participation in the market in the long run.

Member of Saudi Economic Association's (SEA) Board Saad Althagfan

For his part, Saad Althagfan, member of Saudi Economic Association's (SEA) board, agreed that the allocation of shares to retail investors has been decreasing. However, he pointed out that individual investors could benefit from IPO-focused equity funds, which typically receive a higher share allocation compared to individual investors.

Viability and Benefits of Retail IPO Participation Despite Limited Allocation

Al Attas emphasized that retail IPO participation remains beneficial despite limited allocation, as it allows investors to achieve quick gains. Some IPOs experience strong price surges during their initial trading sessions, enabling investors to sell at a profit even if they receive only a small number of shares.

He also noted that IPOs contribute to portfolio diversification, granting retail investors access to new companies that were previously unavailable. This helps spread risk while allowing entry at an initial pricing level, as offering prices are often lower than the stock's market price post-listing. This provides IPO participants with a competitive advantage over investors who buy shares later on the open market.

Althagfan added that investor appetite for IPOs remains strong, driving high demand despite the typically low share allocation for individuals, which often does not exceed 10% of the total offering. He also highlighted the appeal of certain IPOs from emerging sectors or companies with sustainable profitability and strong growth prospects.

Effect of Limited Allocation on IPO Appeal for Retail Investors

Al Attas explained that while limited allocation may deter some investors, it is not the sole determinant of an IPO’s attractiveness. He pointed out that expected post-listing stock performance could still make an IPO appealing, even with low allocation, especially for offerings that have seen price increases of 30% to 50% after listing.

He added that some investors focus on the potential return based on the offering price premium rather than just the number of allocated shares. Others may participate in IPOs intending to buy more shares if prices drop post-listing, as has happened in some previous offerings.

Meanwhile, Althagfan stated that limited allocation could absorb liquidity, especially when IPOs occur in close succession. He suggested that the solution lies in increasing the percentage of shares allocated to retail investors to better match the high demand.

Impact of Limited Allocation on Market Liquidity and Retail vs. Institutional Participation

Al Attas highlighted that limited allocation policies affect various factors related to market liquidity and retail investor participation. He explained that this often leads to increased short-term speculation, as retail investors tend to sell immediately after listing, causing heightened short-term volatility without contributing to sustained liquidity.

He further noted that if the limited allocation policy persists, retail investors may become hesitant to participate in future IPOs, potentially reducing overall demand for public offerings. In contrast, institutional investors typically receive higher allocations, which helps stabilize stock prices post-listing but diminishes the influence of retail investors on market movements.

Moreover, he stressed that lower retail share allocation results in a higher concentration of stock ownership among institutions, which could impact long-term stock liquidity.

Role of Capital Market Authority in Balancing Retail and Institutional Allocation

Al Attas emphasized that regulatory bodies play a crucial role in setting allocation standards and ensuring a balance between retail and institutional investors. He suggested several potential solutions, including revising the minimum allocation threshold and prioritizing retail investors in certain IPOs.

He also recommended enhancing transparency regarding allocation criteria and clarifying the distribution mechanism between retail and institutional investors to help investors make informed decisions. Additionally, offering incentives—such as allocating extra shares to investors who hold their stock for a specified period post-listing—could encourage long-term investment.

For his part, Althagfan stressed the importance of increasing the share allocation for retail investors to better reflect high demand levels. This, he argued, would enhance retail participation and create a more balanced market between individual and institutional investors.